Don't choke the recovery

February 18, 1983

In terms of importance to the economy, the US Federal Reserve Board cannot be said to take a back seat to any institution in Washington. These are the individuals who to a large extent determine the availability of money and credit within the giant American marketplace. The decisions they make will not only influence the durability of the current recovery but also determine whether that recovery reignites inflation and thus leads to a new recession down the road.

At the moment the Fed is engaged in a delicate high-wire act as it seeks a middle course between achieving a sustained recovery and preventing future inflation. The way it goes about that balancing act deserves the closest attention - and support - of Congress and the American people. Although much of what the Fed does is secret, enough is known to suggest that its current approach combines just about the right mix of flexibility, attention to money supply target ranges, and recognition of the dangers of excessive or precipitous changes in monetary policy as has too often happened in the past.

As was stressed by Chairman Paul Volcker in his testimony before Congress this week, it is absolutely necessary that the Fed ensure a steady, orderly course as it continues to reduce the rate of growth in the nation's money supply.

That does not mean, however, that the Fed should so restrict an expansion of money as to choke off recovery. In fact the new money target figures announced by the Fed indicate the agency is on course. In recent months the Fed has shot up the nation's basic money supply at an annual rate of some 15 percent. Although some of that surge has been technical - explained by bank deregulation, including new bank money market instruments - the overall growth rate has still been substantial.

The new money supply target ranges, moreover, are now pegged slightly higher than last year: M1, for example, the nation's basic money supply, is set at a 4 percent to 8 percent growth rate this year, compared to 2.5 percent to 5.5 percent last year. M2, a broader measure, is now slated for a 7 per-cent to 10 percent growth for 1983, compared to 6 percent to 9 percent in 1982. This gives the Fed more official leeway for money growth. Thus, all indications are that the Fed has tilted its policy toward recovery - but at the same time is aware of the need to avoid a new round of inflation.

Underscoring its cautious and flexible approach, the Fed wisely plans to review its target levels in May of this year, rather than wait until the regular review in July.

The Fed's current task is not an enviable one, especially when it must also work around a soaring federal deficit. This will require all the care and alertness that can be mustered. But the American people should be reassured by signs that the Fed is trying to steer a responsible course.